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The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series

Author

Listed:
  • Ahlgren, Niklas

    () (Hanken School of Economics)

  • Antell, Jan

    () (Hanken School of Economics)

Abstract

Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of the correspond- ing asymptotic tests. The e¤ect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymp- totic test. The bootstrap test estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings.

Suggested Citation

  • Ahlgren, Niklas & Antell, Jan, 2009. "The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series," Working Papers 541, Hanken School of Economics.
  • Handle: RePEc:hhb:hanken:0541
    as

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    References listed on IDEAS

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    1. Doornik, Jurgen A, 1998. " Approximations to the Asymptotic Distributions of Cointegration Tests," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 573-593, December.
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    3. Saikkonen, Pentti & L tkepohl, Helmut, 1999. "Local Power Of Likelihood Ratio Tests For The Cointegrating Rank Of A Var Process," Econometric Theory, Cambridge University Press, vol. 15(01), pages 50-78, February.
    4. Ahlgren, N. & Antell, J., 2008. "Bootstrap and fast double bootstrap tests of cointegration rank with financial time series," Computational Statistics & Data Analysis, Elsevier, vol. 52(10), pages 4754-4767, June.
    5. Russell Davidson & James MacKinnon, 2000. "Bootstrap tests: how many bootstraps?," Econometric Reviews, Taylor & Francis Journals, vol. 19(1), pages 55-68.
    6. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-126, February.
    7. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    8. Davidson, Russell & MacKinnon, James G., 2006. "The power of bootstrap and asymptotic tests," Journal of Econometrics, Elsevier, vol. 133(2), pages 421-441, August.
    9. Soren Johansen, 2002. "A Small Sample Correction for the Test of Cointegrating Rank in the Vector Autoregressive Model," Econometrica, Econometric Society, vol. 70(5), pages 1929-1961, September.
    10. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
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    Keywords

    Cointegration; Likelihood ratio test; Test power; Bootstrap;

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